How Bharti Airtel lost the love of Dalal Street after a string of downgrades

The government has approved Trai's proposal to redistribute airwaves in the 900 MHz largely held by incumbents such as Bharti, and substitute it with frequencies in the 1800 MHz, a move that may force the company to shell out billions of dollars towards building new networks when its permits come up for renewal beginning 2014.

Based on the outcome of the Presidential Reference in the Supreme Court, Bharti and other incumbents may also have to shell out a substantial sum as a one-time expense for the 'excess spectrum' they hold beyond the contracted 6.2 MHz mark. The telco will also have to match the prices in the upcoming auctions for all the airwaves it holds when its mobile permits come up for renewal soon.

Standard Chartered, which has cut Bharti's stock rating to 'in-line' from 'outperform', said the delay in spectrum auctions implied an 'extended period of pressure on mobile profitability'. It also pointed out that aggressive data rollout would accentuate the near-term pressure on profitability given the lagged impact on revenues.

Bharti's revenue market share (RMS) fell from 32.5% in the first quarter of 2010-11 to 29.1% in the fourth quarter of 2011-12, forcing the company to first hike tariffs and then increase talk time for select plans. But this strategy has so far not resulted in an increase in RMS and has attracted criticism from some analysts for having forced the company to invest more in passive infrastructure.

"Bharti dropped a bomb by highlighting significant increase in its 2G cell site addition...Bharti's change in strategy to focus on RMS beginning this quarter has prompted this increased investment, which in our view may hurt longer term profitability, given that there is not much voice growth left and making money on these new cell sites will be challenging," said an HSBC research report.

The telco, earlier this month, said its loss-making African operations may not meet its target of $5 billion in revenues and $2 billion in core earnings, or EBITDA, for the year to March-end 2013. The average revenue per user for its African operations has fallen by 12% to $6.5 since it acquired Zain's operations in that continent even as the company's per-minute revenue declined 35% in the same period.

The Citi research report said Bharti's revenue growth has slowed down as knock-on effects of the European debt crisis begin to weigh on African economies. Morgan Stanley added that Bharti's revenues and EBITDA for African operations in the quarter ended June were 'worse than its expectations', as it cut the company's 'revenue estimates by 4-9% in F2013-15 on the back of tariff wars in Africa'.